Study Of The Challenges That Hinder MSME Development In Serbia : Country Report for the British Council and Swedish Institute

Abstract

The Republic of Serbia (referred to as Serbia in this report) is situated at the crossroads between Central and Southern Europe, both geographically being in the Balkan peninsula and the Pannonian Plain; and, politically being a political nexus, or perhaps more correctly a competition point between Russia, the European Union and China. Politically, Serbia has been integrating internationally and is a member of the Council of Europe (CoE), Organization of the Black Sea Economic Cooperation (BSEC) and the Central European Free Trade Agreement (CEFTA). It has been negotiating EU accession since 2014. Conventional Western Development paradigms such as, the “Washington Consensus” (Williamson, 2005) and EU action plans (e.g. for accession to the EU) can be summarised as including the privatisation of state assets, measures to reduce corruption and macro-economic stabilisation. This process, seeks to create conditions for inbound direct investment to transform the economy towards private sector growth (Wojciechowski, 2013). In this synthesis, emphasis on “supply side” measures such as market liberalisation, skills improvement, governance and the promotion of free market competition become the key roles of government. Inbound FDI flows are also a measure of which countries are actively engaged in supporting local economic development; although the data has to be treated with care as a significant part of these flows relates to the financial system (often through bond issues) and so may find its way into domestic consumption rather than fixed capital investment. The main countries for inbound capital flows to Serbia in 2016, were the Netherlands and Austria, followed by Luxembourg and Russia. Luxembourg again looks like a financial system flow; whilst Russia can be firmly pegged as a flow to mainly fund investments in energy infrastructure (Bjelotomic, 2017). The relative lack of FDI to deepen and build businesses that are integrated into complex pan EU supply chains deprives Serbia of a key development driver. To reiterate from above, large international companies investing in new plant and machinery and updating existing assets, smooth the adoption of international product and regulatory standards and grow and nurture their own network of supply MSME companies. They also provide an important source of orders and revenue, without which obtaining commercial finance becomes more challenging, as lenders like to see either, long lending track records or secure orders and future payment cash flows. It is this gap that needs to be filled by entrepreneurs creating new businesses in sectors that have strong export potential and where a competitive advantage can be built. Having identified the “entrepreneurial gap” there are two sides to filling it. First, there is the demand side of people who want to become entrepreneurs. To understand more about the “demand motivations” (a need highlighted in Bobić’s 2017 study of Serbian Youth Entrepreneurship) we surveyed 100 prospective entrepreneurs. 1. Our survey indicates that around 38% of Serbian entrepreneurs are opportunity-seeking entrepreneurs, with 62% largely involuntary. Contrasted to the region as a whole, this suggests that Serbia has a higher appetite for opportunity-driven entrepreneurship than other states in the Western Balkans. 2. This higher aspiration towards opportunity-driven entrepreneurship is reflected in the 52% who aspire to be entrepreneurs and 43% who wish to be self-employed (contrasting to the regional levels of 33% vs. 57%). 3. There is a higher preference for establishing a business in professional services in Serbia than other Western Balkan states, perhaps reflecting the larger size and regional importance of the Serbian economy, as well as the educational mix of the survey sample. 4. IT and Web businesses are only the target of 5% of our sample, emphasising that entrepreneurship covers much more than “silicon” focused businesses. There is however some indication that these businesses are more popular in Serbia than most other Balkan States, and this may reflect the efforts in terms of education, incubators, mentoring, awareness and networking events that are being made in Serbia. 5. Against this there is a risk that these businesses could become low cost outsourced technical “body shops” for North Europe companies looking to reduce their IT costs, rather than stand alone globally competitive IT / Web product companies (which if successful should command higher margins and be capable of sustaining higher growth rates). There is also a “brain drain” risk into Northern Europe for the most skilled staff. 6. Only 14% of our sample in Serbia was under 25 years old, suggesting that there could be a need to raise the entrepreneurial appetite of young people.